Revenue cannot disturb consistent method of accounting being followed by assessee

UHDE India Pvt. Ltd. Vs Addl. Commissioner of Income Tax (ITAT Mumbai)

We find that the assessee has accumulated cost as well as revenue under these projects in the Balance Sheet by following completed contract method. The revenue has accepted such accumulation during AYs 2004-05 & 2005-06 and this is the third year of accumulation under the projects. It is not the case of the revenue that the income under these projects have not been offered to tax in subsequent years. No case of revenue leakage has been established before us. Therefore, the action of revenue in disturbing the consistent method of accounting being followed by the assessee could not be held to be justified. Hence, we delete the impugned additions and allow these grounds of appeal.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The captioned cross appeals-one filed by the assessee and the other by the Revenue – are directed against the order of the Commissioner of Income Tax (Appeals)-24, Mumbai [in short ‘CIT(A)’] and arise out of the assessment u/s 143(3) of the Income Tax Act 1961 (the ‘Act’). As common issues are involved, we are proceeding to dispose them off by this consolidated order for the sake of convenience.

2. Briefly stated the facts of the case are that the assessee-company filed
its return of income for the assessment year (AY) 2008-09 on 26.09.2008 declaring total income of Rs.39,02,18,840/-. The assessee is engaged in the business of supply of processes; designing, construction and commissioning of complete plants for chemical fertilizers, petrochemicals, refining and other related industries.

At the start of hearing, the Ld. counsel for the assessee submits that the assessee would not like to press the 5^th and 10^th to 14^th grounds of appeal. Having considered the submission of the assessee, the above grounds of appeal are dismissed as not pressed.

3. The 1^st to 4^th ground of appeal, reproduced below, are discussed together, as they address a common issue:

1 The Ld. CIT(A) erred in confirming taxation of an amount of Rs.63,09,36,232/-as income, in respect of contracts accounted under “Percentage of Completion” (POC) Method.

2 The Ld. CIT(A) failed to consider that the appellant was following a regular method of accounting sanctified by Accounting Standards.

3 The Ld. CIT(A) failed to consider that the addition made of Rs.63,09,36,232/-has resulted in taxing gross receipts, without allowing deduction for expenditure required to earn such receipts.

4 Without prejudice to ground Nos 1 to 3 above, the Ld. CIT(A) erred in not allowing deduction (following his own method) where the sale proceeds recognized by the Appellant were higher than the billings done during the year.

4. In Schedule 6 of the Balance Sheet, the assessee has shown progressive billings on incomplete contracts at Rs.1,195,233,767/- as liability. The same is appearing under “advances received from clients”. The break-up of advances received against progressive billings is as under :

During the course of assessment proceedings, the assessee submitted before the AO that out of percentage of completed contracts of Rs.847,505,498/-, the advances of incompleted contracts were already taxed at Rs.216,569,265/-. Further, it was explained to the AO that as per accounting standard, the assessee has booked sales based on percentage completion method which is reflected by actual cost incurred by it and not based on bills raised which are based on various milestones reached in the project. The AO was not convinced with the above submission of the assessee on the ground that the accounting standard (AS-7) is not recognized u/s 145(2) of the Act ; since the assessee is following mercantile system of accounting, all the invoices i.e. progress billings raised by the assessee should have been reflected in the total sales in the books of accounts as on 31.03.2008 ; the ratio of actual direct costs incurred till reporting date to total expected direct costs on the contract as the basis of fixation of percentage of completion by the Institute of Chartered Accountant (ICA) would not give true profit earned by the assessee. The AO held that the ratio of the actual sales till the reporting date to the total sale price of the project would give the correct figure of percentage completion of the project. Accordingly, the AO made an addition of Rs.63,09,36,233/- treating it as under-statement of profits in respect of 28 contracts which are accounted under percentage completion method, allowing due credits for the amounts taxed in earlier years.

5. In appeal, the Ld. CIT(A) followed the order of his predecessor-in-office for the earlier assessment year 2006-07 and confirmed the above disallowance made by the AO.

6. Before us, the Ld. counsel for the assessee submits that the issues raised in the above grounds of appeal are decided in favour of the assessee by the order of the Tribunal- dated 09.04.2019 in assessee’s own case for AY 2006­07; dated 08.06.2020 in assessee’s own case for AY 2007-08 and dated 07.08.2020 in assessee’s own case for AY 2009-10.

The Ld. Departmental Representative (DR) supports the order passed by the AO, which is confirmed by the Ld. CIT(A).

7. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. We find that similar issue arose before the Tribunal in assessee’s own case for AYs 2006-07, 2007-08 and 2009-10. We may refer here to the relevant paragraphs of the order of the Tribunal for AY 2006-07 (ITA No. 1691/Mum/2012) :

“2.5 Ground Nos. 7 to 11: Income in respect of Contracts Accounted under Percentage of Completion Method.

2.5.1 By way of these grounds, the assessee is contesting the addition of Rs.28.84 Crores which represent understatement of profits in respect of projects accounted under the project completion method. During assessment proceedings, it transpired that the progress billing representing the aggregate of invoices raised in respect of different projects exceeded the sale revenue recognized by the assessee in the books of accounts to the extent of Rs.28.84 Crores. The sales revenue from these projects were accounted for on Percentage Completion Method [PCM]. The Ld. AO opined that the progress billing represented the actual work done by the assessee under each project and further, costs incurred up-to date on these projects were also debited in the profit & loss account and therefore, there was understatement of income. In other words, in the opinion of Ld. AO, the billing done by the assessee under these projects were to be recognized as sales revenue in the books of account as against recognized by the assessee on the basis of percentage of completion method of accounting since progress billing was nothing but the actual work completed by the assessee under the project. Although the assessee defended the same vide reply dated 25/11/2009 by submitting that the revenue is recognized on the basis of percentage of completion method, however, not convinced, Ld. AO opined that revenue recognized in the books was less than progress billing and therefore, the PCM adopted by the assessee as per AS-7 to recognize the revenue did not represent real profits earned by the assessee. Further, by adopting this method, the true sales were not being reflected in the books. Finally, disregarding the assessee’s submissions, an amount of Rs.28.84 Crores representing understatement of profits in respect of 28 contracts was disallowed and added to the income of the assessee. The details of the same has already been reproduced on page nos. 12 to 14 of the quantum assessment order. The stand of Ld. AO, upon confirmation by first appellate authority, is under appeal before us.

2.5.2 The Ld. Sr. Counsel submitted that the assessee was following percentage of completion method [PCM] with respect to contracts commencing after 01/04/2003 to recognize the revenue from these contracts. This was done in view of the amended AS-7 which necessitated the assessee to follow this method to recognize the revenue. As per this method, the revenue is recognized on the basis of stage of percentage of completion of contracts. To determine the percentage of completion, the following formula was adopted: –

Total Cost incurred till the end of the accounting year
Budgeted Cost

It was explained that the revenues were recognized by applying this fraction to the contract value. However, to ensure that the project was sufficiently funded, the assessee raised progress billings from time to time based on pre-decided milestones. These bills were raised only for the purpose of meeting funding requirements and had nothing to do with determination of extent of completion of contract or recognition of revenue since recognition was done the basis of formula mentioned above so as to ensure matching cost and revenues. Our attention is drawn to the explanation furnished by the assessee before first appellate authority to justify progress billings under the projects. The Ld. Sr. Counsel further submitted that the objective of progress billing was to ensure working capital availability and it was nothing but advances from customers and therefore, could not be regarded as assessee’s income. Reliance has been placed on the decision of this Tribunal rendered in IOT Infrastructure & Energy Services Ltd. [ITA No. 7035/M/2010 17/05/2013] which has been upheld by Hon’ble Bombay High Court in ITA No. 2296 of 2013 dated 18/04/2016.Reliance has been also been placed on the decision of this Tribunal rendered in Toyo Engineering Corp. Vs. DDIT [ITA No.6600/Mum/2002 22/03/2004] &the decision of Kolkata ITAT rendered in M.N.Dastur & Co. Ltd. [61 ITD 167].

2.5.3 Per contra, Ld. CIT-DR submitted that progress billing was nothing but invoice that was intended to obtain payment from the customer for that portion of project which had already been completed to date. Therefore, progress bills were nothing but actual work done and the method adopted by assessee was faulty as it was cost based revenue while the correct method would be actual cost spent by the assessee. The progressive billing has to be as per value of each contract and not as per the cost of the contract. Our attention is drawn to the fact that the project was completed to the extent of 98.3% whereas the assessee has taken the completion to the extent of 96.8% only by taking the direct actual cost. The case law of JOT infrastructure has sought to be distinguished on the ground that in that case progressive billing was done not for the amount of work done but for the mobilization and other advances receivable by the assessee as against the fact of the present case where the billing has been done wholly on the basis of work completed and there was no advance involved.

2.5.4 However, Ld. Sr. Counsel, in the rejoinder, submitted that progress billing had nothing to do with the recognition of the revenue since revenue were recognized on the basis of percentage of work done to ensure matching of cost and revenues in accordance with the accounting standards and therefore, progress billing could not be construed to be an invoice raised for the portion of the contract that has been completed to date rather it is only a billing done as per pre- decided milestones. Our attention is drawn to the fact that progress billing also takes into account an amount received initially as advance even though no work was carried out at that stage and accordingly, there will be a mismatch between work completed and amount invoiced to client throughout the project. It has been submitted that revenues have been recognized as per AS-7 and the same method of accounting was being followed by the assessee since AY 2004-05 onwards.

2.5.5 Upon careful consideration, the undisputed position that emerges is that the assessee is following consistent method of accounting to recognize the revenue under these contracts. The percentage of completion of the project has been worked out as per total cost incurred on the project to date vis-à-vis total budgeted cost and that fraction is applied to the contract value for the purpose of revenue recognition. Similar formulae have been adopted by the assessee in preceding two years which has been accepted by the revenue. No case of revenue leakage has been established before us. Nothing on record suggest that remaining income under the project has not been offered by the assessee in subsequent years, following the same method of accounting. Simply because progress billing was more than the stage of percentage of completion, the same, in itself, could not be the basis to usurp the consistent method of accounting being followed by the assessee. Therefore, the additions made by the revenue, under the circumstances, could not be sustained. We order so. Accordingly, ground Nos. 7 to 11 of assessee’s appeal stands allowed.”

7.1 Facts being identical, we follow the above order of the Co-ordinate Bench and allow the 1^st to 4^th ground of appeal.

8. The 6^th ground of appeal :

The Ld. CIT(A) erred in taxing the excess of progress billings over inventories, amounting to Rs.5,62,02,457/- as income in respect of contracts accounted under the “Completed Contract Method” and which were incomplete as on 31^stMarch, 2008.

The 7^th ground of appeal :

The Ld. CIT(A) erred in rejecting the regular method of accounting followed by the appellant and accepted by the Department in the past.

9. The AO noticed that the assessee-company has shown aggregate of progress billing of Rs.347,728,269/- in the liability side of the balance sheet as on 31.03.2008, which are pertaining to overall progress billings of Rs.1195,233,767/-. In the audit report, it is mentioned at Schedule 10 of the accounting policy that in respect of contracts upto 31.03.2003, the contract revenue is recognized on completed contract basis. Thus in respect of contracts upto 31.03.2003, the assessee is following completed contract method for revenue recognition and contracts after 31.03.2003, the assessee is following percentage of completion method for revenue recognition. In response to a query raised by the AO to explain why the profits should not be computed in respect of projects started before 31.03.2003, it was submitted by the assessee that for the contracts received upto 31.03.2003, the assessee was following completed contract method ; it was not possible for it to change the method of accounting for running contracts and so it was not done. However, the AO was not convinced with the above explanation of the assessee for the reason that the assessee could have easily booked the profits as per the stage of the contract and started following percentage completion method as per later contracts. The working filed by the assessee before the AO is extracted below :

The AO rejected the completed contract method of accounts followed by the assessee and made an addition of Rs.5,62,02,457/- treating it as on account of under-statement of profits.

10. In appeal, the Ld. CIT(A) followed the order of his predecessor-in-office for AY 2006-07 and confirmed the above addition made by the AO.

11. Before us, the Ld. counsel relies on the order of the Tribunal dated 09.04.2019 in assessee’s own case for AY 2006-07 and order dated 07.08.2020 for AY 2009-10.

On the other hand, the Ld. DR relies on the order of the Ld. CIT(A) confirming the above addition made by the AO.

12. We have heard the rival submissions and perused the relevant materials on record. Similar issue arose before the Tribunal in assessee’s own case for AY 2006-07. The Tribunal vide order dated 09.04.2019 held as under :

“2.6 Ground Nos. 12 to 13: Excess of Progress Billings- understatement of profit in respect of incomplete contracts obtained prior to 31/03/2003 and accounted under Completed Contract Method

2.6.1 This addition of Rs. 396.15 Lacs represents alleged understatement of profit in respect of incomplete contracts accounted under Completed Contract Method [CCM]. It was noted that as per accounting policies, the assessee was following Completed Contract Method[CCM]for contracts received / started up-to 31/03/2003 and for contracts after this cut-off date, percentage completion method was being followed to recognize the revenue in the books of accounts. The dispute, under these grounds, is with respect to contracts started before 31/03/2003 wherein the assessee followed completed contract method. During assessment proceedings, it transpired that the assessee raised invoices against these 13 projects for Rs.22.52 Crores and reflected the same on the liabilities side of the Balance Sheet. Similarly, the costs of Rs.18.56 Crores were accumulated against these projects and reflected on the asset side of the Balance Sheet. The Ld. AO opined that though substantial work was done under these projects and invoices were also raised, no profit was shown against the same. Resultantly, the differential of the two amounts i.e. Rs.396.15 Lacs was added to the income of the assessee. The stand of Ld. AO, upon confirmation by first appellate authority, is under appeal before us.

2.6.2 The Ld. Sr. Counsel submitted that the costs as well as revenues are recognized under these projects on completed contract method. These revenues as well as costs were accumulated in the similar manner for AYs 2004-05 & 2005-06 also which has been accepted by the revenue and therefore, there was no reason to disturb the same in this AY. Per contra, Ld. CIT-DR submitted that, upon change of method of accounting, the revenues from such projects were to be offered to taxation.

2.6.3 Upon careful consideration, we find that the assessee has accumulated cost as well as revenue under these projects in the Balance Sheet by following completed contract method. The revenue has accepted such accumulation during AYs 2004-05 & 2005-06 and this is the third year of accumulation under the projects. It is not the case of the revenue that the income under these projects have not been offered to tax in subsequent years. No case of revenue leakage has been established before us. Therefore, the action of revenue in disturbing the consistent method of accounting being followed by the assessee could not be held to be justified. Hence, we delete the impugned additions and allow these grounds of appeal.”

12.1 Facts being identical, we follow the above order of the Co-ordinate Bench and delete the addition of Rs.5,62,02,457/- made by the AO. Accordingly, the 6th & 7th ground of appeal are allowed.

13. The 8^th ground of appeal The Ld. CIT(A) erred in disallowing expenditure towards Repair and Maintenance of Rs.3,70,80,058/- by holding that the repairs and renovation carried out by the appellant led to major renovation, and was capital in nature.

The 9th ground of appeal

The Ld. CIT(A) failed to consider the expenditure on repairs was in respect of such items which could not be removed from licensed premises.

14.During the course of assessment proceedings, the AO noticed that the assessee is going for major expansion ; the expenses for such expansion and renovation are also claimed under the head “Repairs & Maintenance Expenses”. The AO further found that the assessee has carried out major expansion and renovation work at Raj Plaza, Doghal Plaza and various other offices. The AO on examination of the following bills reached the following findings:

Bill No. I 2007/3224-

Bill describes expenses for panels, cables & switch gear, point wiring, electrical fittings and fans, floor raceways & UPS raw power wiring, networking passive, fibre work, fire alarm system, heat sensors system, miscellaneous . The total bill is Rs.17,71,552/- inclusive of VAT of Rs.1,26,495/-.

Bill No. I 2007/3403

This bill has items regarding providing and fixing ceramic tiles in toilets, Black granite pantry counter, wash basins, mirrors, sanitary fitting, curtains, sundry work, flooring, new exhaust fans, new conference table, overhead storage in meeting rooms, providing partitions, vertical blinds, new chairs, earthing, air conditioning work etc.

Bill No. 2007/3669

This bill pertain to furniture, storage units, lamination, finishing, gypsum, partition, false ceiling, fixing of new wash basins, urinals, making work table, conference table, cabin tables, new doors, new sofa sets.

During examination of bills, similar descriptions were found for I 2007/3650, I 2007/4056, I 2007/4699, I 2007/4636 etc.

From the details given above it is very clear that repair and maintenance claimed by the assessee are not in the nature of revenue expenses and so the total amount of Rs.36,605,353/- described above is disallowed and added to the assessee’s income.”

There is a mistake in the above total amount, which would be Rs.3,70,80,058/-.

15. In appeal the Ld. CIT(A) held that the assessee itself has admitted that the expenditure of Rs.84,95,567/- on Uhde House was renovation and repair work of South Block to accommodate the Managing Director and Executive Directors and therefore, it could not be said that renovation and repair was revenue in nature.

Further observing that in the case of expenditure at Duggal Plaza, Pune of Rs.1,05,09,493/-, the assessee has itself admitted that the space was reconfigured to accommodate more employees, for which repairs and renovation works were carried out, the Ld. CIT(A) held the expenditure as capital in nature.

In the case of expenditure of Rs.1,72,82,818/- at Raj Plaza, the Ld. CIT(A) held that :

“As far as the expenditure of Rs.1,72,82,818/- at Raj Plaza is concerned, it is seen that the nature of expenditure was such as to accommodate 500 persons in the premises spread over approx. 28,800 sq. ft. The appellant itself admits that Raj Plaza was an old building and although an office premises existed there, the same were not in a layout which was suitable to accommodate the appellant’s employees and hence, repairs and renovation were carried out to ensure use of the same to the benefit of appellant’s business. The appellant also stated that in April,2010, the entire amount of Rs. 38 crore spent towards construction of the new building (North Block) was capitalized. As the movement of 500 employees to Raj Plaza was to enable to demolish the old North Block building, looking into the nature of expenditure carried out at Raj Plaza, the appellant should have even capitalized the same expenditure towards the new North Block building because had the employees not moved out and occupied the temporary office premises for 33 months at Raj Plaza, the demolition of old building at North Block and construction of new building could not have taken place. Thus, there was a direct link between the movement of the employees and demolition and construction of the new building (North Block) and hence, in the above facts of the case, it is held that the amount spent by the appellant towards the accommodation of its 500 employees at Raj Plaza has a live nexus with the new asset coming into being at North Block which was owned by the appellant. Accordingly, it is held that even the expenditure of Rs.1,72,82,818/- was in the nature of capital expenditure De-hors this finding, even otherwise, the expenditure carried out by the appellant as repairs and renovation was in the nature of capital expenditure leading to major renovation or erection of assets and hence, the findings given- by the Ld. AO are confirmed and therefore, ground No. 7 is dismissed.”

However, the Ld. CIT(A) directed the AO to allow depreciation on the capital expenditure at rates specified in the Rules.

16. Before us, the Ld. counsel relies on the decision in CIT v. Talathi & Panthaky Associated (P.) Ltd. (18 taxmann.com 365) (Bom) ; CIT v. Urban Infrastructure Venture Capital Ltd. (ITA No. 65 of 2015) (Bom).

On the other hand, the Ld. DR relies on the decision in Ballimal Naval Kishore v. CIT (1997) 224 ITR 414 (SC), Oxford University Press (1977) 108 ITR 166 (Bom) and Vardhman Developers Ltd. (2015) 55 Taxman 370 (ITAT Mumbai). Further it is stated by him that Raj Plaza in Mumbai and Duggal Plaza in Pune are leased premises whereas the South Block is the own premise of the assessee. Further, reliance is placed by the Ld. DR on section 30 of the Act and thereby he makes a difference between current repairs and other repairs and explains that the case of the assessee is not covered by section 30 of the Act. Further it is explained by him that Explanation-1 to section 32(1) of the Act was inserted w.e.f. 01.04.1988.

In rejoinder, the Ld. counsel submits that the assessee has claimed deduction u/s 37(1) of the Act and the issue of claim u/s 30 does not arise.

17. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below.

We begin with the case laws relied on by the Ld. counsel. In Talathi & Panthaky Associated (P.) Ltd. (supra), the assessee-company was a tenant in a building occupying 5000 sq. ft. The said building was declared by the Municipal Corporation to be unsafe for occupation and an eviction notice was served on the occupants. Thereafter, a partition suit was preferred by the co-owners of the building. A court receiver was appointed and the assessee being a tenant in the building continued to pay rent to the receiver. In that suit, consent terms were entered into under which a developer was to repair and re-construct the building at his costs, and, therefore, to handover certain portion (area) to the co-owners. The consent terms contemplated that either a co-operative society, a limited company or a condominium comprising of the tenants, occupants and co-owners shall be formed. Under the terms, tenancy of the assessee was confirmed; and the assessee assumed an obligation to contribute a sum of Rs.1.50 crores for the work of repair and restoration of the structure ; and it further provided that there would be no increase in the rent payable by the assessee which continued to be Rs.11,300/- per month. The Assessing Officer held that the assessee had secured rights for an area of 5000 sq. ft. on a payment of a sum of Rs.1.50 crores and assessee was to become a member of a society or company. That according to the Assessing Officer, would constitute deemed ownership of the premises. The Assessing Officer, therefore, came to the conclusion that the expenditure of Rs.1.50 crores was of capital in nature and had to be disallowed. The CIT(A), however, reversed the view taken by the Assessing Officer. The Tribunal, confirmed the order of the CIT(A). On appeal by the Revenue, the Hon’ble Bombay High Court held that :

“The issue as to whether expenditure incurred by an assessee is of a revenue or capital nature has fallen for determination in various contexts, but in all decisions particularly of the Supreme Court what has been emphasized is that the matter has to be looked at from a commercial point of view. [Para 7]

In CIT v. Madras Auto Service (P.) Ltd. [1998] 233 ITR 468/ 99 Taxman 575 (SC) the assessee had in fact incurred the entire cost of construction of a new building but obtained no title to the new construction. The benefit which the assessee obtained was a long lease of thirty nine years on low rent. The Supreme Court held that the asset which was created belonged to someone else. The assessee was held to have obtained an enduring business advantage for the purpose of conducting the business profitably and more successfully, thus saving a considerable amount of revenue expenditure over the term of the lease. In the instant case, there is a concurrent finding of fact both by the Commissioner (Appeals) and affirmed by the Tribunal that the assessee was and continues to be a tenant. The character of the occupation of the assessee has not been altered. The assessee by contributing an amount of Rs. 1.50 crores to the reconstruction of the building has obtained an enduring advantage but nonetheless of a commercial nature of securing an equivalent area on the same rent of Rs. 11,300 in the new structure. The ownership of the new structure has not been transferred to the assessee nor has the assessee acquired any capital asset. The case, therefore, cannot be distinguished from the situation which arose before the Supreme Court for its decision in Madras Auto Service (P.) Ltd. (supra ) on any principled basis. [Para 8]

At this stage, it would be necessary to note that the decision of the Supreme Court in Madras Auto Service (P.) Ltd. (supra) arose in relation to Assessment year 1968-69 which was prior to the insertion of Explanation I to section 32. Explanation I has been inserted by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 with effect from 1-4-1988. Explanation I stipulates that where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of the clause shall apply as if the said structure or work is a building owned by the assessee. In order that Explanation I is attracted, it is necessary that any capital expenditure is incurred by the assessee. In other words, it is necessary to emphasise that what Explanation I brings about is a deeming fiction by which expenditure of a capital nature incurred by the assessee for the purposes stipulated therein including inter alia for the construction of any structure or the work of renovation, extension or improvement can form the basis of a claim for depreciation as if the structure or work is a building owned by the assessee. But for the Explanation, an assessee would not be entitled to the benefit of depreciation even if the expenditure which was incurred was of a capital nature and the effect of the Explanation is to entitle the assessee to the benefit of the provisions of section 32, if the stipulations and conditions set out in the Explanation are fulfilled. The deeming fiction is for the purposes of the statutory provision in question. But the point to be emphasized is that the explanation operates in a situation where capital expenditure is incurred by the assessee. Unless the expenditure is of a capital nature, there would be no occasion to apply the deeming fiction that is carved out by Explanation I. In the instant case, the conclusion has already been arrived that the assessee had not incurred any expenditure of a capital nature. The expenditure did not result in the acquisition of a capital asset by the assessee. The assessee continued as before to be a tenant in respect of the premises. By contributing an amount of Rs. 1.50 crores towards the reconstruction or as the case may be renovation of the existing structure, the assessee obtained a commercial advantage of securing tenancy of an equivalent area of premises on the same rent as before. Since there was no acquisition of a capital asset and the occupation of the assessee continued in the character of a tenancy, the expenditure could not be regarded as being of a capital nature. [Para 10]

The decision of the Tribunal, which confirms the view taken by the Commissioner (Appeals) that the expenditure was of a revenue nature does not fall for any interference in instant appeal. For the aforesaid reasons, the question of law is answered by holding that the cost of repair/reconstruction of the tenanted premises was of a revenue nature and was legitimately allowable as and by way of deduction. No error can be found in the judgment of the Tribunal. [Para 11]”

17.1 In M/s Urban Infrastructure Venture Capital Ltd. (supra), the question of law before the High Court for the following :

“6.1 Whether, on the facts and in the circumstances of the case and in law, the ITAT, Mumbai, was right in ignoring the provisions of Explanation 1 to section 32(1) of the Income Tax Act, 1961 and thereby holding the capital Expenditure incurred by the assessee on leased premises as Revenue Expenditure?”

The Hon’ble High Court vide order dated 17.07.2017 held that :

“6. Explanation 1 to Section 32(1) of the Act was a subject matter of interpretation and consideration of this Court in case of Talathi and Panthaky Associates Pvt Ltd. (supra). This Court has observed that in order that Explanation-I is attracted, it is necessary that any capital expenditure is incurred by the assessee. It is necessary to emphasis that what Explanation I brings about is a deeming fiction by which expenditure of a capital nature incurred by the assessee for the purposes stipulated therein including inter alia for the construction of any structure or the work of renovation, extension or improvement can form the basis of a claim for depreciation as if the structure or work is a building owned by the assessee. But for the Explanation, an assessee would not be entitled to the benefit of depreciation even if the expenditure which was incurred was of a capital nature and the effect of the Explanation is to entitle the assessee to the benefit of the provisions of Section 32.

7. It is trite that explanation cannot read dehors the provision. The explanation is in aid to the provision.

8. The expenses as are culled out in the order of the Tribunal are sufficient to imply that same are Revenue in nature and not capital. The expenses are in the nature of building maintenance charges to the society, labour charges, charges for carpenter work, plumbing work, masonry work, pending labour charges and provisional fees.

9. The Tribunal has rightly considered the expenses as Revenue in nature. In the light of the above, no substantial question of law arises. The appeal as such is dismissed. No costs.”

18. Then we turn to the case laws relied on by the Ld. DR. In Ballimal Naval Kishore (supra), the assessee carries on the business of exhibiting films in a theater called “Naval Talkies” at Panipat. He had purchased the said building in 1937. It was a ginning factory then. He ran the factory till 1940. In the year 1945, he converted it into a cinema theater and was exhibiting films therein. During the period 1960 to March 1961, the assessee extensively repaired the theater by expending substantial amounts. The amount spent by him are: on machinery Rs.16,002/-, new furniture Rs.27,889/-, sanitary fittings Rs.5,225/-and replacement of electrical wiring Rs.13,604/-. In addition thereto, a total amount of Rs.62,977/- was spent on extensive repairs to walls, to the hall, to the flooring and roofing, to doors and windows and to the stage sides etc. Actually, the theatre had to be closed during the aforesaid period for effecting the repairs. In the assessment proceedings, relating to the assessment year, the assessee claim deduction of the aforesaid amount of Rs.62,977/-. The Income Tax Officer disallowed the same considering it as capital expenditure. On appeal, the Hon’ble Supreme Court held that :

“The expression used in Section 10(2)(v) is “current repairs” and not mere “repairs”. The same expression occurs in Section 30(a)(ii) and in Section 31(i) of the Income Tax Act, 1961. The question is what is the meaning of the expression in the context of Section 10(2). In New Shorrock Spinning and Manufacturing Company Ltd., Chagla, C.J., speaking for the Division Bench, observed that the expression “current repairs” means expenditure on buildings, machinery, plant or furniture which is not for the purpose of renewal or restoration but which is only for the purpose of preserving or maintaining an already existing asset and which does not bring a new asset into existence or does not give to the assessee a new or different advantage. The learned Chief Justice observed that they are such repairs as are attended to as and when need arises and that the question when a building, machinery etc. requires repairs and when the need arises must be decided not by any academic or theoretical test but by the test of commercial expediency. The Learned Chief Justice observed:

“The simple test that must be constantly borne in mind is that as a result of the expenditure which is claimed as an expenditure or repairs what is really being done is to preserve and maintain an already existing asset. The object of the expenditure is not to bring a new asset into existence, nor is its object the obtaining of a new or fresh advantage. This can be the only definition of ‘repairs’ because it is only by reason of this definition of repairs that the expenditure is a revenue expenditure.

If the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, then obviously such an expenditure would not be an expenditure of a revenue nature but it would be a capital expenditure, and it is clear that the deduction which, the Legislature has permitted under Section 10(2)(v) is a deduction where the expenditure is a revenue expenditure and not a capital expenditure.”

In taking the above view, the Bombay High Court dissented from the view taken by the Allahabad High Court in Ramkrishan Sunderlal vs. Commissioner of Income Tax, U.P. [(1951) 19 I.T.R..324] where it was held that the expression “current repairs” in Section 10(2)(v) was restricted to petty repairs only which are carried out periodically. The Learned Judge agreed with the view taken by the Patna High Court in Commissioner of Income Tax vs. Darbhanga Sugar Co. Ltd. [(1956) 29 I.T.T.21] and by the Madras High Court in Commissioner of Income Tax vs. Sri Rama Sugar Mills Ltd. [(1951) 21 I.T.R.191] In Liberty Cinema vs. Commissioner of Income-Tax, Calcutta [52 I.T.R.153], P.B. Mukharji, J., speaking for a Division Bench of the Calcutta High Court, held that an expenditure incurred with a view to bring into existence a new asset or an advantage of enduring nature cannot qualify for deduction under Section 10(2)(v).

In our opinion the test involved by Chagla C.J. in New shorrock Spinning & Manufacturing Company Limited is the most appropriate one having regard to the context in which the said expression occurs. It has also been followed by a majority of the High Courts in India. We respectfully accept and adopt the test.

Applying he aforesaid test, if we look at the facts of this case, it will be evident that what the assessee did was not mere repairs but a total renovation of the theatre. New machinery, new furniture, new sanitary fittings and new electrical wiring were installed besides extensively repairing the structure of the building. By no stretch of imagination, can it be said that the said repairs qualify as “current repairs” within the meaning of Section 10(2)(v). It was a case of total renovation and has rightly been held by the High Court to be capital in nature. Indeed, the finding of the high Court is that as against the sum of Rs.17,000/- for which the assessee had purchased the factory in 1937, the expenditure incurred in the relevant accounting year was in the region of Rs.1,20,000/-.”

18.1 In Oxford University Press (supra), the assessee is a company carrying on business of publishers and book sellers, importing and selling books published by the Oxford University. The assessment year is 1963-64. During the accounting period relevant to the assessment year the assessee incurred an expenditure of Rs.59,000 in the form of payment made to M/s. John Fleming & Co. for guniting work carried on in its building known as “Oxford House” and also a sum of Rs.3,680 as fees paid to the architects in connection with guniting work undertaken on the advice of the architects. The assessee claimed both the items as expenditure incurred for repairs to their building. The Income-tax Officer observed that the repairs in question could not be called “current repairs” but that the assessee had undertaken major structural repairs which had the effect of prolonging the life of the building for a least 15 years and as the repairs resulted in extension of the period of the serviceableness of the asset and in the creation of an enduring benefit, the expenditure was a capital expenditure. The Hon’ble Bombay High Court held that :

“This court held in the case of Gulamhussein Ebrahim Matcheswalla v. CIT [1974] 97 ITR 24 (Bom.), that the expression ‘repair’ must be understood in contradistinction to renewal or restoration and the test to be applied is to see whether as a result of the expenditure what is being done is to preserve and maintain an already existing asset. If the amount is spent for the purpose of bringing into existence a new asset or obtaining a new advantage then such an expenditure would not be revenue expenditure. The mere quantum of expenditure is not by itself decisive of the question whether it is of the nature of revenue or capital. A sum can be allowed as cost of repairs even though the expenditure in a particular year is heavy on account of the fact that it is undertaken to remedy the effect of several years of wear and tear or neglect and also in spite of the fact that such expenditure may not be necessary for several years to come after repairs have been effected. It is thus clear that what the court is required to find out is whether as a result of the expenditure a new asset or a new advantage is being brought into existence. The court will also have regard to the aspect as to whether as a result of the expenditure what is being done is to preserve and maintain an already existing asset.

In the instant case, it was clear as to why and in what circumstances the guniting work was undertaken by the assessee in relation to the building. In their letter, the architects of the assessee stated that during the inspection of the building, which was undertaken in January, 1961, it was observed that the reinforcement of the slabs had decayed and cracks were visible underside of the slab and on the floors and some of the steel reinforcement in the slab had little or no cover. Further, that the assessee had been spending good amounts on the repairs of such cracks and plasterings of the slabs on which the reinforcements had disappeared but the amount spent for plaster patch work that was undertaken was a waste and that, therefore, since the plastering by means of an ordinary method was of no use, plastering by the process of guniting was advised. The nature of the guinting process was explained by the assessee. Having regard to the nature of the guniting process that was undertaken for carrying out the plastering and repair work to the building and the reasons and circumstances as to why the guniting process had been employed, it became very clear that by employing this method, which was nothing but an improved method of plastering and repairing work, all that the assessee had done was to preserve and maintain the already existing asset. No new asset or new advantage as such could be said to have been brought into existence by reason of expenditure incurred for doing the guinting work. As a result of guniting work done the assessee had not changed the nature of the asset, viz., the building as a whole, and the same in no way increased the accommodation or earning capacity of the building; in that sense no new advantage of enduring benefit had been brought into existence. The repairs also could not be regarded as heavy structural repairs, for, according to the assessee’s architects, what could not be achieved by the ordinary method of plastering was achieved by a sophisticated method of process of guniting. In this view of the matter, it seemed very clear that the expenditure incurred for guniting work done as also the expenditure being the architects’ fees paid in connection therewith would have to be regarded as expenditure of a revenue nature.

All that the assessee did in the instant case was to undertake the plaster repairing work out by adopting a new method called guniting process, and by incurring the expenditure by adopting such a process the assessee was merely maintaining and preserving an asset which it already possessed and thus though to some extent the life of the asset had been prolonged and the asset was made to give better service then it was doing in the past, the expenditure would have to be regarded as revenue expenditure.”

18.2 In Vardhman Developers Ltd. (supra), the assessee is a builder and developer. It had taken an office premises on rent for a period of five years. As the said premises was old and not in use for a long time, it incurred some expenditure towards repair and renovation of the said premises to achieve its functional utility. Its claimed that expenditure was in respect of rented premises and, accordingly, allowable under section 30(a)(i). The revenue raised objection, that the nature and the volume of the expenditure would not qualify it to be a repair, which only could be allowed under section 30. The expenditure was admittedly on renovation and, thus, capital in nature, and would, therefore, stand to be capitalized. On appeal, the Tribunal held that :

“The expenditure was incurred towards false ceiling; fixing tiles/flooring; replacing glasses; wooden partitions; replacement of electrical wiring; earthing; replacement of G.I. Pipes, plumbing and sanitation lines; plaster and painting of walls. A premises, it may be appreciated, is constituted not merely by, or only of, civil structure, in as much as the same by itself does not render it functional for the stated purpose of its user. In fact, the impugned expenditure includes labour for civil work also, so that the work could possibly include some structural changes as well. The issue involved, thus, reduces to as to whether the expenditure on extensive repairs and renovation could be allowed in respect of a tenanted premises. The same can by no means be regarded as ‘current repairs’, the ambit of which is fairly restricted, denoting a repair that is required to be attended to as soon as the need for it arises. ‘Repairs’, though a term of wider scope, yet cannot extend beyond that of the term itself. A repair, by definition, is towards the maintenance and preservation of an ‘existing’ asset. Surely, the advantage or asset, in terms of its functional utility and capacity for the business, needs to be maintained, so that expenditure for retaining the same is essentially revenue expenditure, which, again, by definition, does not lead to or result in an enhancement or improvement. The premises in the instant case was admittedly not in use for a long time and, thus, in a dysfunctional, if not dilapidated, state prior to it being acquired by the assessee. The expenditure incurred on refurbishment and renovation of an old premises, in an inoperable state, so as to make it fit for use. It cannot be classified as ‘repairs’; since expenditure was incurred to render it in a functional state and, therefore, is clearly in the capital field. The ingredients and prerequisites of a capital expenditure would remain the same, and not undergo any change depending on the object matter of the expenditure, i.e., whether an owned or leased premises, and which itself is the premise of Explanation 1 to section 32(1)(ii), invoked by the revenue. [Para 6]

The concept of ‘repairs’ and ‘revenue expenditure’ were considered as pari materia and co-extensive in as much as in the view of the Court, repair could not, by definition, include capital expenditure. [Para 6]”

19. The distillation of precedents must now be applied by us to the facts of the case. In CIT v. Gitanjali Mills Ltd. (2004) 265 ITR 681 (Mad.) , it is held that an expenditure that is not deductible u/s 30 to 36 can still be allowed as a deduction under the residuary section 37 of the Act. The residuary nature of the provision in section 37(1) will have to be given its full meaning. A legitimate claim in accordance with the principles of accountancy and according to well-established commercial practice and which must be taken into account in ascertaining the true profits and gains of business cannot be denied unless some statutory provision in clear words or by necessary implication negatives the adoption of such principle and practice as held in CIT v. High Land produce Co. Ltd (1976) 102 ITR 803 (Ker.) affirmed by the Hon’ble Supreme Court in (1986) 158 ITR 419.

In CIT v. Madras Auto Service(P.) Ltd. (1998) 233 ITR 468 (SC), the Hon’ble Supreme Court has held that “ where an old building taken on lease by the assessee was demolished by him and rebuilt to reoccupy the new building for a further period of 20 years at the old rent, it was held that the expenditure was revenue in nature.”

The moot question is the determination of whether repair is in the nature of revenue expenditure or capital expenditure. The following criteria would be relevant in deciding the nature of repair:

(i) Whether the expenditure has been incurred to create any new asset or for maintaining the business of the company;

(ii) Whether the expenditure is giving rise to any benefit of an enduring nature or any added advantage to the asset or any increase in the efficiency or increasing the production capacity thereof;

(iii) Whether the expenditure has been incurred to preserve or maintain an already existing asset.

In the instant case, the said expenditure has been incurred by the assessee for maintaining its business, for increasing its efficiency and for preserving its already existing asset. Thus the expenditure hereinabove is revenue in nature and therefore allowable. Accordingly, we allow the 8^th and 9^th ground of appeal.

20. The 15^th ground of appeal relating to levy of interest u/s 234B and 234D is consequential in nature.

21. The assessee has filed an additional ground of appeal which reads as under :

1. The appellant submits that the liability incurred on account of Education Cess and Higher and Secondary Education Cess on income tax amounting to Rs.38,25,296/- should not be disallowed u/s 40(a)(ia).

2. The appellant relies on the judgment of the Hon’ble Bombay High Court in Sesa Goa Ltd. v. JCIT (ITA No. 17 and 18 of 2013 dated 28t^h February 2020).

22. The Ld. DR objects to the admission of the above additional ground stating that the original appeal was filed by the assessee on 30.05.2016, whereas, the above additional ground was filed on 31.07.2020 after four years. The Ld. counsel argues that the order of the Hon’ble Bombay High Court in Sesa Goa is dated 28.02.2020 and after going through the above judgment, the assessee has filed the above additional ground and the same may be admitted for adjudication.

23. We have heard the rival submissions and perused the relevant materials on record. The order in Sesa Goa (supra) is dated 28.02.2020. The above additional ground is squarely covered in favour of the assessee by the decision of the Hon’ble Bombay High Court in the case of Sesa Goa Ltd. (supra) and Hon’ble Rajasthan High Court in the case of Chambal Fertilizers & Chemicals Ltd. (ITA No. 52 of 2018). As per the above decisions, the amount of education cess and higher & secondary education cess is not tax as covered u/s 40(a)(ii) and accordingly allowable as deduction in computing the income from business or profession. Following the above decisions, we admit and allow the additional ground of appeal filed by the assessee.

In the result, the appeal filed by the assessee is allowed.

24. The grounds of appeal filed by the Revenue read as under :

i. Whether on the facts and circumstances of the case, the Ld. CIT(A) was correct in allowing the provision towards cost on completed contract and provision towards cost over runs on incomplete contracts both being unascertained and non-crystallized liabilities.

ii. Whether on the facts and circumstances of the case, the Ld. CIT(A) was correct in relying only on the ITAT decision in assessee’s case for A.Y. 2005-06 without appreciating the fact that the issue is not final yet, and Revenue is in appeal before the Hon’ble Bombay High Court against the said ITAT decision.

25. Facts being identical, the Ld. CIT(A) has rightly followed the order of the Tribunal in assessee’s own case for AY 2005-06. The Hon’ble Madhya Pradesh High Court in Agrawal Warehousing and Leasing Ltd. v. CIT 257 ITR 235 has held that the orders passed by the Tribunal are binding on all the tax authorities functioning under the jurisdiction of the Tribunal. While so holding, it followed the decision of the Supreme Court in UoI v. Kamlakshi Finance Corporation Ltd. AIR 1992 SC 711, 712 which has ruled thus:

“The principles of judicial discipline requires that the order of the higher appellate authorities should be followed unreservedly by the subordinate authorities. The mere fact that the order of the appellate authority is not ‘acceptable’ to the Department -in itself an objectionable phrase -and is the subject matter of an appeal can furnish no ground for not following it unless its operation has been suspended by a competent court. If this healthy rule is not followed, the result will only be undue harassment to assessee and chaos in administration of tax laws.”

In the result, the appeal filed by the Revenue is dismissed.

26. To sum up, the appeal filed by the assessee is allowed, whereas the appeal filed by the Revenue is dismissed.

Order pronounced in the open Court 16/03/2021.